The Economics Of Solar Power

Fossil fuels, namely crude oil, natural gas and coal, are the world’s number one source of energy. Despite being a non-renewable source, there is still a high demand for fossil fuels due to their affordability and reliability. From heating and lighting homes to fueling vehicles, fossil fuels play an integral role in energy production and the global economy.

Even with the massive strides made in technological innovation, sustainable energy has failed to usurp traditional fossil fuels. In order to incentivize renewable energy adoption, governments have levied tax credits for solar and wind energy, which until recently, were far more expensive than the status quo. However, due to increased production, government subsidies and mounting environmental concerns, the costs of solar and wind production have decreased. In fact, some markets generate renewable energy more cheaply than fossil fuels. While wind energy is predominantly used for commercial means, such as wind farms, solar energy has both commercial and residential uses.

Fossil Fuels

Although an exact date is difficult to determine, many estimates suggest that fossil fuels will be depleted within the next 100 years. While sources of coal, natural gas and crude oil continue to deteriorate, consumption of fossil fuels has not. The U.S. Energy Information Administration reports that fossil fuel production and consumption rose to 70 quadrillion and 80 quadrillion British thermal units (BTUs) in 2014 from 62 quadrillion and 77 quadrillion respective BTUs in 2012. This represents a 3% increase in fossil fuel consumption over a two-year span.

Amongst all energy sources, fossil fuels trump both renewable energy and nuclear power. In 2014, fossil fuels accounted for over 80% of energy consumed while renewable energy comprised a mere 10%. Not only are fossil fuels nonrenewable, they are also a cause of various adverse environmental effects. Burning fossil fuels is the leading producer of anthropogenic CO2, which has contributed significantly to climate change. Notable effects include global warming, melting ice in the Arctic, rising sea levels and poor crop yields.

While the U.S. spends over $1 trillion annually on fossil fuels, the harmful effects from burning them continue to accumulate economic costs. In 2009, it was estimated that the costs of burning fossil fuels in the U.S. were $120 billion a year in health costs mostly due to air pollution. Research suggests air pollution in Europe generates economic costs of $1.6 trillion a year in diseases and death. Combining expenditures on fossil fuels, healthcare costs, and environmental degradation, it is estimated the true cost of fossil fuels is $5.3 trillion a year globally.

Solar Power

Though renewable energy represents a fraction of total energy consumed, the U.S. is the leading consumer of renewable energy. Yet, despite the increase of available solar energy over the past 10 years, solar still only accounts for 0.4% of total energy used in the U.S. Solar power also trails hydropower, biomass and wind in terms of preferred sources of renewable energy, making up 4% of total U.S. renewable consumption.

Currently, only two types of solar technology exist that are capable of converting the sun’s energy into a source of power: solar thermal and photovoltaic. Solar thermal collectors absorb the sun’s radiation in order to heat a home or water. Photovoltaic devices use sunlight to replace or supplement the electricity provided on the utility grid.

Solar Power Adoption

Until recently, solar energy systems were only accessible to the wealthy or fanatical. However, due to sharply declining costs, universal access to solar paneling systems is becoming a reality. In the early 2000s, the average U.S. solar system cost $10 per watt; in 2013, the price per watt was just below $4. As a result, the number of photovoltaic systems installed in the U.S. has drastically increased among residential and commercial spaces. Over the past decade, it is estimated that the global output from photovoltaics has increased 40% each year.

Solar energy has seen a global increase in consumption as more countries recognize the harmful effects of burning fossil fuels. Increased competition within the solar power industry has resulted in sharp declines in installation costs. Many of the largest economies, including the U.S., China, India and several European nations, have begun to implement solar energy. In an effort to combat pollution, China has made the biggest push into renewable energy and installed the most photovoltaics in 2014. Similarly, India, which is also plagued by pollution, is making a $160 billion plan for solar energy expansion.

Although solar power continues to account for a small share of overall energy supply, the residential and commercial sectors are slowly embracing renewable energy. As prices continue to decline, it is expected that solar energy systems become more prevalent. In Europe, the price per kilowatt hour is expected to decline to between 4 and 6 cents in 2025 and further decrease to as low as 2 cents in 2050.

Assuming forecasts are correct, solar photovoltaics will be amongst the cheapest sources of energy. With declining prices, the IEA conservatively estimates solar systems to supply 5 percent of global electricity consumption in 2030, rising to 16 percent by 2050. Achieving this vision would require increasing the global capacity of solar energy from 150 gigawatts in 2014 to 4600 gigawatts by 2050. As a result, this would avoid the emission of 4 Gt of carbon dioxide annually.

In conjunction with increased production of renewable energy, there is an increasing commitment to declining greenhouse gas emissions from burning fossil fuels. Many cities and countries around the world have committed to cutting greenhouse gas emissions 80 percent by 2050, including New York City. Besides cutting emissions, California has committed to producing 33% of total energy by renewable resources by 2020.

Tax Credits

Even though solar energy systems are more cost-effective today, residential and commercial usage still receive government subsidies. In the U.S., the Renewable Energy Tax Credit decreases the tax liability of solar energy users. A taxpayer can claim a credit of 30% of qualified expenditures for systems that serve an occupied space. The U.S. government applies the same credit to wind and geothermal systems.

Many European countries impose a Feed-In-Tariff scheme to increase the appeal of renewable energy systems. Under a feed-in-tariff scheme, renewable energy system owners can collect money from the government. Costs are based on per kilowatt-hour (kWh), with prices varying between countries.

The Bottom Line

For the most part, the commitment to renewable resources has come from individuals, big businesses and countries. Besides solar energy, companies such as Google (GOOG) and Amazon (AMZN) have committed to using wind to power company facilities. With big businesses, individuals and countries continuing to transition to renewable energy sources, adverse environmental effects from burning fossil fuels can hopefully be moderated.

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